Cryptocurrency and the Custody Rule: Legal Pitfalls in Managing Digital Assets

A live 90-minute premium CLE webinar with interactive Q&A


Tuesday, October 8, 2019

1:00pm-2:30pm EDT, 10:00am-11:30am PDT

or call 1-800-926-7926

This CLE webinar will examine the legal and operational issues in establishing custody of cryptocurrencies and other digital assets on a blockchain or distributed ledger. The panel will discuss custody requirements that apply to various industry players under existing federal securities laws, including the Investment Advisers Act, and the challenges they face in safeguarding digital assets and complying with those requirements.

Description

Custody generally refers to the possession or control of an asset. Digital assets are reflected on distributed ledgers in the form of binary digits. They may represent cryptocurrencies like Bitcoin, the ownership of physical or other assets, or the right to deploy smart contracts on a blockchain platform. Counsel must be able to advise investors and their advisers on how to establish and maintain custody of these virtual assets.

A private key is necessary to claim and spend all digital assets associated with a related public key or address on a blockchain. Any person who accesses the private key can spend those assets and, given the immutability of the distributed ledger system, those assets almost certainly will not be recoverable by the owner. Control of the relevant private key is a paramount concern, and safeguarding the private key through secure custodial arrangements is the primary goal under current custody methods.

Rule 206(4)-2 (the Custody Rule) under the Investment Advisers Act establishes specific safekeeping requirements applicable to funds or securities held on behalf of clients by registered investment advisers. Digital assets present storage, control and audit issues not contemplated under existing custody rules. Unlike typical investments in securities and debt instruments, there may not be any registrar records, trusted intermediaries, counterparties, administrative agents, or other traditional sources of ownership verification or evidence of ownership.

Listen as our authoritative panel discusses the operational complexity of custodial arrangements relating to digital assets. The panel will also discuss the security issues presented by blockchain and the unanswered questions relating to third-party custody of digital assets under the Custody Rule and other applicable federal laws.

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Outline

  1. What constitutes custody on a blockchain
  2. Hot and cold storage: security vulnerabilities
  3. Third-party custodial arrangements--qualified custodians
  4. The Custody Rule: issues presented by distributed ledger technology
  5. Operational and practical issues

Benefits

The panel will review these and other critical issues:

  • What are digital assets, and how are they represented on a distributed ledger?
  • What is a private key, and how is control of the private key implemented in custodial arrangements?
  • What are some of the security issues presented by blockchain, and how can a custodian protect against them?
  • Without central recordkeeping, can digital asset custodial records be audited?
  • What are the compliance issues presented by the Custody Rule?

Faculty

Berman, Kenneth
Kenneth J. Berman

Partner
Debevoise & Plimpton

Mr. Berman, a member of the Investment Management Group, focuses his practice on providing regulatory and compliance...  |  Read More

Lim, Byungkwon
Byungkwon Lim

Partner
Debevoise & Plimpton

Mr. Lim advises a wide range of clients, including banks, other dealers and end-users, on derivatives regulatory...  |  Read More

Murphy, Gary
Gary E. Murphy

Counsel
Debevoise & Plimpton

Mr. Murphy represents technology companies, financial institutions and other institutional clients in the structuring...  |  Read More

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